Managerial Finance Chapter 1 (an Overview)

7/24/2019 Managerial Finance Chapter 1 (an Overview)

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Copyright 2012 Pearson Prentice Hall.

Chapter 1

The Role of

Managerial

Finance


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COURSE DESCRIPTION

This corse provides stdents !ith the "ac#grond

#no!ledge of financial indstry and the introdction

to the theory of financial $anage$ent that providepractical "asis for financial decision $a#ing and

valation of financial secrities.


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COURSE MATERIALS

Textbooks

%it$an& 'a!rence (.& Chad (. )tter& *2012+ Principles of

Managerial Finance*1,th ed.+ Addison-esley& Reading

MA.

Computing / Software

/t is ass$ed that all stdents have a "asic nderstandingof the se of cel spreadsheet.


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Course Learning Outcomes (CLO

1!"


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ASSESSMENT

Corse!or# *Tests& i3& Assign$ents4Pro5ect+ - 607

Final a$ - 807


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1!#

Lega$ %orms o& 'usinessOrganiation

A sole proprietorshipis a business owned by one person

and operated for his or her own profit.

A partnershipis a business owned by two or more

people and operated for profit.

A corporationis an entity created by law. Corporations

have the legal powers of an individual in that it can sue

and be sued, make and be party to contracts, and acquireproperty in its own name.

Finance theories and techniques apply to all.


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)hat is the *oa$ o& the &irm+

9 /s there a "ench$ar# that serves as an

appropriate $easre of !hether an action

shold proceed or not:

9 Mai$i3e profit

9 Mini$i3e epenses

9 Mai$i3e $ar#eting share

9 Mai$i3e share price

9 Mai$i3e sta#eholder !ealth

1!,


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*oa$ o& the %irm.Ma/imie Shareho$0er )ea$th

Decision rule for managers only take actions that are

e!pected to increase the share price.


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;hare Price < Ftre =ividends

Re>ired Retrn

$e2e$ 3 timing

o& cash &$o4s

ris5 o& cash

&$o4s

*oa$ o& the %irm.

Ma/imie Shareho$0er )ea$th666

hy:

?ecase $ai$i3ing shareholder !ealth properly considerscash flo!s& the ti$ing of these cash flo!s& and the ris# of

these cash flo!s. This is pri$arily !hat the o!ners !ant

This can "e illstrated sing the follo!ing si$ple stoc#valation e>ation@


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*oa$ o& the %irm.)hat A8out Sta5eho$0ers+

Stakeholdersare groups such as employees, customers,

suppliers, creditors, owners, and others who have a direct

economic link to the firm.

A firm with astakeholder focusconsciously avoidsactions that would prove detrimental to stakeholders. "he

goal is not to ma!imi#e stakeholder well$being but to

preserve it.

%uch a view is considered to be &socially responsible.&


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The Ro$e o& 'usiness Ethics

Business ethicsare the standards of conduct or moral

'udgment that apply to persons engaged in commerce.

(iolations of these standards in finance involve a variety

of actions creative accounting,Bearnings management,misleading financial forecasts, insider trading, fraud,

e!cessive e!ecutive compensation, options backdating,

bribery, and kickbacks.

)egative publicity often leads to negative impacts on a

firm


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The Ro$e o& 'usiness Ethics.Ethics an0 Share Price

*thics programs seek to

reduce litigation and 'udgment costs

maintain a positive corporate image

build shareholder confidence

gain the loyalty and respect of all stakeholders

"he e!pected result of such programs is to positively affect

the firms share price.

+s there a place in business for the -olden ule/00


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Manageria$ %inance %unction.Re$ationship to Economics

Financial managers must understand the economic

framework and be alert to the consequences of varying

levels of economic activity and changes in economic

policy. "hey must also be able to use economic theories as

guidelines for efficient business operation.

Marginal cost;benefit analysis is the economic principlethat states that financial decisions should be made and

actions taken only when the added benefits e!ceed the

added costs


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1!1"

Manageria$ %inance %unction.Re$ationship to Accounting

"he firms finance and accounting activities are closely$

related and generally overlap.

+n small firms accountants often carry out the finance

function, and in large firms financial analysts often helpcompile accounting information.

1ne ma'or difference in perspective and emphasis

between finance and accounting is that accountantsgenerally use the accrual method while in finance, the

focus is on cash flows.


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1!1.Corporate *o2ernance

Corporate governancerefers to the rules, processes, and

laws by which companies are operated, controlled, and

regulated.

+t defines the rights and responsibilities of the corporateparticipants such as the shareholders, board of directors,

officers and managers, and other stakeholders, as well as

the rules and procedures for making corporate decisions.


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1!1,

*o2ernance an0 Agenc>.*o2ernment Regu$ation

"he %arbanes$1!ley Act of 2332

established an oversight board to monitor the accounting industry4

tightened audit regulations and controls4

toughened penalties against executives who commit corporate fraud;

strengthened accounting disclosure requirements and ethical guidelines forcorporate officers;

established corporate board structure and membership guidelines;

established guidelines with regard to analyst conflicts of interest4

mandated instant disclosure of stock sales by corporate e!ecutives4

increased securities regulation authority and budgets for auditors andinvestigators.


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1!1-

*o2ernance an0 Agenc>.The Agenc> Issue

A principal-agent relationshipis an arrangement in

which an agent acts on the behalf of a principal. For

e!ample, shareholders of a company 5principals6 elect

management 5agents6 to act on their behalf. gency problemsarise when managers place personal

goals ahead of the goals of shareholders.

gency costsarise from agency problems that are borneby shareholders and represent a loss of shareholder

wealth.


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1!1

The Agenc> Issue.

The Agenc> Pro8$em

henever a $anager o!ns less than 1007 of the fir$s

e>ity& a potential agenc> pro8$emeists.

/n theory& $anagers !old agree !ith shareholder !ealth

$ai$i3ation.

Ho!ever& $anagers are also concerned !ith their personal

!ealth& 5o" secrity& fringe "enefits& and lifestyle.

This !old case $anagers to act in !ays that $ight not

al!ays "enefit the fir$ shareholders.


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1!97

The Agenc> Issue.

Management Compensation P$ans

!ncentive plansare management compensation plans that

tie management compensation to share price4 one e!ample

involves the granting of stock options.

"erformance planstie management compensation tomeasures such as *7% or growth in *7%. 7erformance

shares and8or cash bonuses are used as compensation

under these plans.


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The Agenc> Issue. The Threato& Ta5eo2er

9hen a firms internal corporate governance structure is

unable to keep agency problems in check, it is likely that

rival managers will try to gain control of the firm.

"he threat of takeover by another firm, which believes itcan enhance the troubled firms value by restructuring its

management, operations, and financing, can provide a

strong source of e!ternal corporate governance.


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1!99

Career Opportunities in%inance. Manageria$ %inance

? Managerial financeis concerned with the duties of the financial

manager working in a business.

? #inancial managersadminister the financial affairs of all types of

businessesDprivate and public, large and small, profit$seeking and

not$for$profit.

? "hey perform such varied tasks as developing a financial plan or

budget, e!tending credit to customers, evaluating proposed large

e!penditures, and raising money to fund the firms operations.

(ery involved with strategic planning and implementation


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1!9:

Manageria$ %inance (cont=

"he recent global financial crisis and subsequent

responses by governmental regulators, increased global

competition, and rapid technological change also increase

the importance and comple!ity of the financial managersduties.

+ncreasing globali#ation has increased demand for

financial e!perts who can manage cash flows in different

currencies and protect against the risks that naturally arisefrom international transactions.

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Managerial Finance Chapter 1 (an Overview)

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